KEMPER Corp quarterly report, Q1 FY2011

Business context and reporting period

Unitrin, Inc. and subsidiaries’ unaudited Form 10-Q covers the three months ended March 31, 2011, with comparisons to Q1 2010. The filing reports the Kemper, Unitrin Specialty, Unitrin Direct, Life and Health Insurance, and Fireside Bank segments. The filing is under the name Unitrin, Inc.; the supplied text does not establish a different registrant name for this period. Dollar amounts below are in millions unless stated otherwise.

Key financial metrics

Net investment income was $81.6 versus $80.8. Net realized investment gains rose to $14.5 from $4.5, while impairment losses recognized in earnings fell to $0.4 from $3.2. Discontinued operations generated a $1.7 loss versus $0.5 income. The quarterly dividend was $0.24 per share, up from $0.22.

Segment underwriting ratios were mixed: Kemper’s combined ratio rose to 100.0% from 96.9%; Unitrin Specialty’s rose to 101.1% from 99.0%; and Unitrin Direct’s rose to 121.4% from 108.4%. Life and Health Insurance operating profit increased to $50.8 from $40.5. Figures are segment results, not consolidated margins.

Material changes versus the prior comparable period

• Premiums declined in Kemper, Unitrin Specialty, and especially Unitrin Direct; Life and Health premiums were slightly higher. Lower premiums and a planned runoff reduced Fireside Bank automobile finance revenue to $15.5 from $30.6.
• Continuing income improved despite lower revenue, helped by higher investment gains, lower impairment losses, and improved Life and Health and Fireside Bank results. Other expense increased to $19.7 from $16.4.
• Fireside Bank reported $8.0 net income versus $3.0, including a negative $13.8 provision for loan losses versus a $2.9 provision in 2010. Its loan receivables declined to $278.1 from $337.6 at year-end.
• Operating cash flow increased by $47.7; investing cash flow was $68.6 versus $92.9, and financing activities used $181.5 versus $101.2. Financing outflows included $149.1 of certificate-of-deposit repayments and $18.3 of common-stock repurchases.
• At March 31, total insurance reserves were $4,169.4, down from $4,182.4 at year-end. P&C reserves reflected $1.7 of favorable prior-year development, compared with $11.5 favorable development in Q1 2010.

Outlook, management commentary, risks and unusual items

• Storm losses: The company said April 2011 spring storms, including a record volume of tornadoes, were expected to materially affect Q2 results, but not materially affect consolidated shareholders’ equity. Claims were still being investigated and settled.
• Insurance outlook: Kemper expected earned premiums to decline in the short term as lower policy volume was partly offset by higher rates. Unitrin Specialty expected personal auto policies in force to flatten in Q2 and remain flat through the second half. Unitrin Direct expected sequential earned premiums to continue declining through the remainder of 2011.
• Fireside Bank wind-down: The bank was exiting automobile finance. In April it redeemed all certificates of deposit remaining at March 31, paying $172.7 plus $6.9 of future interest, using cash and investments, operating cash flow, and a $30.0 draw on its Unitrin credit line. It intended to surrender its industrial bank charter in Q2 and expected to repay the draw by quarter-end and return at least $265 of capital to Unitrin. These are management expectations, not completed results in the quarter.
• Capital and liquidity: Unitrin had a $245.0 unsecured revolving facility, expiring October 2012, with no borrowings at March 31. Parent-held cash and investments were $84.2. Insurance subsidiaries paid $45.5 in dividends to Unitrin in Q1; the company estimated a further $139 could be paid during the rest of 2011 without prior regulatory approval. The board authorized up to $300 of share repurchases; approximately 0.7 million shares were repurchased in Q1 for an aggregate $21.7.
• Investment and market risks: Nearly 94% of fixed maturities were investment grade. Investment unrealized losses were $28.1 at March 31; management judged the declines temporary and said it did not intend, nor expect to be required, to sell the affected securities before recovery. A modeled instantaneous 100-basis-point rate increase implied a $322.4 decline in fixed-maturity fair value; a modeled 30% equity-market decline implied a $112.6 decline in equity securities’ fair value. These are sensitivity scenarios, not forecasts.
• Other risks and contingencies: Management cited uncertainty in P&C loss reserves, catastrophe exposure, subprime auto-loan performance, regulatory and legal matters, investment valuations, and the effects of health-care reform on some accident and health products. Pending legal proceedings were not expected to materially affect shareholders’ equity, but could materially affect results in a particular period. No significant risk-factor changes from the 2010 Form 10-K were reported.
• Unusual items: The Life and Health segment’s life benefits fell partly because of a reserve adjustment correcting expiry dates for certain extended-term life policies. The filing also reports $2.6 of restructuring costs incurred in Q1, primarily employee termination costs.

Most important facts for investors to verify

• Actual Q2 catastrophe claims, reserve development, and the realized financial impact of the April storms.
• Whether the planned Fireside Bank charter surrender, repayment of its $30.0 draw, and expected capital return of at least $265 occurred on schedule.
• Whether premium and policy-count declines continue, particularly in Unitrin Direct, and whether its combined ratio improves from 121.4%.
• Future loan recoveries, charge-offs, delinquency trends, and reserve adequacy as Fireside Bank’s subprime portfolio runs off.
• Investment-portfolio valuation and credit developments, including the assumptions supporting management’s temporary-impairment conclusions.
• Capital deployment under the $300 repurchase authorization, dividend capacity, and compliance with credit-agreement and insurance-subsidiary requirements.